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The Essential Resource for Today’s Busy Insolvency Professional

Consumer Corner IIBy Andrew S. HillmAn

It’s My Money, and I Want It Now!Personal-Injury Settlement Transfers and Chapter 7: Whose Jurisdiction Is It, Anyway?

At one time or another, you have probably seen garish television ads proclaiming “I have a structured settlement; it’s my money

and I want it now.” These ubiquitous ads offer a lump sum of cash “now” in return for the sale or “factoring” of settlement payments to be received through the settlement of a personal-injury claim (a “structured settlement”). The recipients of these payments sometimes seek protection in bankrupt-cy from creditors, more often than not pursuant to chapter 7.1 While some or all of the payments might be subject to state or federal exemptions, a trustee will want to sell the remaining payments for the benefit of creditors.2 As a potential purchaser of the payments, a trustee, standing in a debtor’s shoes, would prefer to obtain a bankruptcy court order and not have to seek a substantially similar order from a state court under state statutes that provide for an orderly process to purchase these payments. This article will explore whether a bankruptcy court has the exclusive juris-diction to approve a sale by a trustee of structured settlement payments, or whether a trustee must also seek and obtain state court approval for a sale in the face of state laws that govern the sale of structured settlement payments.

Anatomy of a Structured Settlement Structured settlements are a popular and common method for settling personal-injury and wrongful-death lawsuits.3 A structured settlement is an agree-

ment between a personal-injury plaintiff and a defen-dant liability insurance company (the “obligor”) in which a claimant agrees to settle a personal-injury lawsuit in exchange for periodic payments to be made by the obligor over time. The obligor then purchas-es an annuity policy from a highly rated life insur-ance company (an “annuity issuer”) to make those payments to the plaintiff on behalf of the obligor (a claimant is sometimes referred to as “annuitant” or “seller”). The periodic payments are “structured” in the sense that they are to be paid periodically over time to assist an annuitant to plan for their financial future and ensure that the annuitant does not squander a one-time lump-sum payment. Structured settlements have been likened to spendthrift trusts, since they con-tain anti-assignability clauses that prohibit the assign-ment, sale or transfer of the periodic payments.

Structured Settlement Factoring Transaction At some point in time after an annuitant begins to receive periodic payments, an annuitant may want to sell some or all of them in return for imme-diate cash for various reasons, including life’s basic necessities, school tuition, medical needs, to con-solidate high-interest personal debt or for some other exigent circumstance. In order to do this, annuitants must seek and obtain, pursuant to state structured settlement protection statutes (SSPAs), final state court orders in their state of residence that direct annuity issuers to make the periodic payments directly to the buyer of the payments.4

Andrew S. HillmanSpecialty Asset Advisors Inc.West Palm Beach, Fla.

1 11 U.S.C. § 101, et seq. 2 Debtors’ counsel should determine whether structured settlement annuities are exempt

property under § 522 of the Bankruptcy Code. State statutes differ with respect to how they define the term “annuities,” with some relating to retirement or life insurance annui-ties. Moreover, some state exemption statutes specifically exempt awards from personal-injury or wrongful-death claims but do not include the term “annuities” in those descrip-tions. See Cal. CCP Code section 704.140 (personal-injury causes of action and awards) and Cal. CCP Code section 740.150 (wrongful-death causes of action and awards).

3 Daniel Hindert, “Structured Settlements and Periodic Payment Judgments,” N.Y.L.J. (1986).

Andrew Hillman is president and CEO of Specialty Asset Advisors Inc. in West Palm Beach, Fla.

4 In September 2000, representatives from the National Structured Settlement Trade Association and the National Association of Settlement Purchasers agreed upon language contained in the “Structured Settlement Protection Act (the “SSPA” or “Model Act”). The idea was to effect legislation in the states that would foster the orderly transfer of structured set-tlement payments based on the Model Act. Since then, 49 states have adopted some form of the Model Act, with most of the substantive and procedural provisions remaining extant. See www.ncoil.org/Docs/2011/StructuredSettlementsModel.pdf (last visited Jan. 21, 2015).

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SSPAs are essentially consumer-protection statutes that are designed to prevent annuitants from dissipating their future payments without having a sufficient amount of information to make an informed decision as to whether to sell their periodic payments. SSPAs provide a procedural and substantive road map for this process. They also require that an annuitant dem-onstrate to a judge that the transaction is in the “best interest of the [annuitant] and its dependents.”5 Unless a state court order is obtained that complies with the requirements of an SSPA (a “qualified order”), a buyer of the payments will be subject to an excise tax of 40 percent of the purchase price.6

Are Periodic Payments Part of a Bankruptcy Estate? Section 541 (a) of the Bankruptcy Code provides that a bankruptcy estate consists of all of the debtor’s legal and equitable interest in the debtor’s property as of the date of the filing of the bankruptcy petition.7 Assuming that no federal or state exemptions apply to the periodic payments, whether they become the property of the bankruptcy estate for purposes of § 541, is an issue of federal law (i.e., the Bankruptcy Code).8

Section 541 (c) (1) (A) provides, inter alia, that a debtor’s interest in the property will become property of the estate regardless of any applicable restrictions, whether contractual or under nonbankruptcy law. It follows then that notwith-standing that periodic payments are not assignable by the very terms of the settlement agreement, and that the disposi-tion of the periodic payments is subject to SSPA compliance, the periodic payments are property of the bankruptcy estate.9 In In re Pipkins,10 the debtor was receiving structured settlement payments. The debtor entered into a post-petition sale-factoring agreement, did not disclose the agreement to the bankruptcy court or the trustee, did not initially claim the struc-tured settlement payments as exempt, and did not amend his schedules to reflect the actual value of the payments under the structured-settlement annuity. The trustee argued that notwith-standing that the structured settlement payments, by the terms of the settlement agreement, were not assignable or transfer-able, under § 541 (c) (1) (a) such a provision was unenforce-able and the payments were therefore property of the estate. The court noted that because the trustee “correctly realiz [ed] that the interests in the future structured settlement payments belong to the estate,” the trustee had the authority to enter into an offer to purchase from a different factoring company. The purchasing company was represented by the author.

Jurisdictional Issues: Are Both State and Federal Court Approval Required? Under the terms of SSPAs, “interested parties” in transfer proceedings have the right to object to requests

to sell periodic payments. “Interested parties” expressly includes annuity issuers.11 As previously noted, SSPAs also mandate that in order for a petition for the sale of periodic payments to be approved, a state court judge must find that the transaction is in the best interest of the annui-tant and its dependents. Annuity issuers will occasion-ally object to these transfers on grounds that payments are not assignable, that the periodic payments are obtained from workers’ compensation lawsuits and other reasons. Annuity issuers maintain that the SSPAs, among other things, provide certainty in the payment process and pro-tect their customers (annuitants) from making imprudent financial decisions when transferring periodic payments. On the other hand, a chapter 7 trustee wants to dispose of the periodic payments as efficiently and expeditiously as possible. Having to jump another hurdle to comply with the SSPAs is neither palatable nor indeed necessary in some trustees’ minds. Many annuity issuers have a differ-ent viewpoint: since SSPAs are viewed as protective of their annuitant and the annuity issuers themselves, obtain-ing court orders under SSPAs is essential.

There are at least two conflicting reported cases regard-ing whether a bankruptcy trustee must seek a court order under the SSPAs even after a bankruptcy judge approves the sale by a trustee of the periodic payments. In In re Crossman,12 the court found no conflict between the Illinois SSPA and the Bankruptcy Code as to warrant pre-emption of the Bankruptcy Code over the SSPA. The court con-cluded that the trustee needed to comply with the Illinois SSPA (in addition to obtaining approval in the bankruptcy court) in order to transfer to the buyer the trustee’s right to the periodic payments. In re Jackus13 dealt with an SSPA under New Jersey law that was very similar to Illinois’s. In this case, the state court refused to hear a trustee’s petition for approval of a sale on the grounds that the sale involved property of the bankruptcy estate and that the state court had no role to play with regard to its sale. The bankruptcy judge in Jackus then proceeded to analyze whether the proposed transfer was in the best interest of the bankruptcy estate and the debtor, citing In re Sparks.14 The bankruptcy court in Sparks, in the face of a strong objec-tion of an annuity issuer opposing the sale, disagreed with the Crossman court, stating:

This court respectfully disagrees with the conclusion of the [Illinois] bankruptcy court. Once the property

5 Model Structured Settlement Prot. Act, § 4(a)(1). 6 26 U.S.C. § 5891. Any concern that a bankruptcy estate might be subject to the excise tax for non-

compliance with an SSPA is misplaced. Section 5891 was intended to penalize a purchaser of periodic payments that does not comply with the requirements of an SSPA, but such is not the case here. Periodic payments are part of the bankruptcy estate and it is the trustee (on behalf of the estate) that is selling periodic payments. A selling trustee does not include the definition of a “transferor,” defined in the Model Act as “an individual who is receiving tax free payments under a structured settlement and proposes to make a transfer of payments thereof” (emphasis added).

7 11 U.S.C. § 541(a)(1).8 Fisher v. Apostolou,155 F.3d 876, 880 (7th Cir. 1988).9 See In re Donald C. Pipkins, Case No. 13-30087DM, 2014 Bankr. LEXIS 2654 (Bankr. N.D. Cal. 2014),

(finding that periodic payments under § 541 (c) (1) (a) were part of bankruptcy estate that could be sold by trustee notwithstanding restrictions on alienability on payments).

10 Id.

11 Model Structured Settlement Prot. Act, § 2(f).12 259 B.R. 301 (Bankr. N.D. Ill. 2001).13 442 B.R. 365, 368 (Bankr. D.N.J. 2011).14 2005 WL 1669609, 2005 Bankr. WL 1348, at *5 (Bankr. W.D. Tenn. 2005).

It is clear that courts in at least three different states have differing views as to whether a state court or the bankruptcy court has exclusive jurisdiction to issue a final court order to approve the sale of periodic payments.

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becomes property of the estate, the trustee is autho-rized to use, sell, or lease the property for the benefit of creditors. The state law procedure for approving the assignment of structured settlement payments is designed to protect the payee/beneficiary. The bankruptcy court is in a better position to determine whether the proposed sale is in the best interest of creditors of the estate.15

Observations It is clear that courts in at least three different states have differing views as to whether a state court or the bankruptcy court has exclusive jurisdiction to issue a final court order to approve the sale of periodic payments. No federal appellate court has ruled on this issue. In this regard, In re Wilcox16 is instructive. Although no formal opinion was issued, the court issued an order approving the sale of the periodic payments to the trustee stating that “[t] he sale to [the purchaser] is in the best interest of the bankruptcy estate and the creditors,” and ordered the annuity issuer to make the periodic payments directly to the purchaser.17 The Wilcox court was not con-vinced that a state court order was necessary to approve the sale, relying on Sparks. Some annuity issuers require an order under an SSPA (as well as a bankruptcy court order), while others are content with a bankruptcy order alone. When an annuity issuer objects to a sale that has been filed by a trustee seeking to transfer the periodic payments, the issue is joined. Purchasers of periodic payments argue that since such payments are property of the bankruptcy estate, only a bankruptcy court can approve their sale. It makes no sense to require a trustee to go through the SSPA process in order to realize the estate property’s current value. To the extent an SSPA could be read to require a trustee to comply with an SSPA as did the annuity issuer in Crossman, that process implicates the bank-ruptcy court’s exclusive jurisdiction under 28 U.S.C. § 1334 (c) (1) and must give way to the bankruptcy court’s determination as to what is in the best interest of the bankruptcy estate. As recently explained by the U.S. Supreme Court in Marshal v. Marshall18 in discussing exceptions to federal jurisdiction,

[j] urisdiction is determined ‘by the court’s creation and cannot be defeated by the extra-territorial operation of a [state] statute ... even though it created a right of action’…. [W] e have held that the jurisdiction of the fed-eral courts, “having existed from the beginning of the Federal government, [can] not be impaired by subsequent state legislation.”

SSPAs are consumer-protection statutes primarily designed to assist an annuitant in making informed deci-sions and to ensure that the cash they receive in return for their periodic payments is used in their best interest. When periodic payments are sold in bankruptcy, those same con-cerns are not present. It is the estate that is receiving the proceeds of a sale, and it is always in the best interest of the estate and its creditors that the transaction be consummated.

Thus, compliance with an SSPA in this context is unneces-sary and an artificial barrier to getting creditors paid in a timely fashion. abi

Reprinted with permission from the ABI Journal, Vol. XXXIV, No. 4, April 2015.

The American Bankruptcy Institute is a multi-disciplinary, non-partisan organization devoted to bankruptcy issues. ABI has more than 12,000 members, representing all facets of the insol-vency field. For more information, visit abi.org.

15 Id. at *6 (emphasis added).16 In re William Richard Wilcox, Case No. 13-14558 Order (Bankr. E.D. Pa. 2013). 17 Id. at A.18 547 U.S. 293, 314; 126 S. Ct. 1735, 1749 (2006).